What is the best way to improve my financial forecasting techniques?

Read QuestionsCategory: Financial ModelsWhat is the best way to improve my financial forecasting techniques?
breakouttools Staff asked 3 years ago

I am in the process of doing a financial forecast for income statement, balance sheet, and cash flow.

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1 Answers
alprojam Staff answered 3 years ago

Financial forecasting is necessary for any small business that wants to make plans for the future, and let’s face it: what kind of a business doesn’t want to try and predict the future as much as possible? You rely on your sales forecast to help you plan how to you will face certain challenges and where you think your team will excel. You can also use your financial forecast to motivate your sales team and encourage them to beat the previous year’s numbers.

Of course, a forecast can only go so far. You cannot plan for every little event or disaster that might befall your business or the economy itself, but with good forecasting, you’ll be able to understand how your strengths and weaknesses will help you should you need to weather any storms.

Here are six great ways you can improve your small business’ financial forecasting strategy.

1. Be realistic about goals
As the end of a good year draws to a close, you will probably feel very optimistic about the coming year. And to some degree, you should. Your team has done some great things, and with hard work, the next year should be equally as profitable. The problem with this is that some companies tend to take their success and blow it a little out of proportion. They shoot for goals that are two and three times as high as the previous year without thinking about the potential problems that a company could face, or additional costs required to achieve those goals. What if your best salesperson leave because he or she is moving? What if your industry takes a bit off a hit? How many extra account managers will you need to deal with all your new customers?

While setting high goals can motivate people, it can also depress them when things don’t seem to be going well. As the year goes on and your business is still nowhere near where you forecasted you’d be, your sales team might think, ‘What’s the point?’ Remember that a high goal or target doesn’t mean you’ll hit it. Set a modest, realistic goal, and you’ll be feeling the same happiness when the next year comes to a close.

2. Lay out a specific process
Once you figure out your goals, you need to have a clear idea about how you want to accomplish these goal. Some small business owners think they’ll just continue the way things are and the goals will magically happen. It doesn’t work like that. You need to think about what will make your financial forecast come true.

Part of your forecasting should involve the steps you want to take to meet your goals. You might highlight some examples such as making communication easier between departments or maybe you want to look at other project management systems that will be more conducive to your line of work.

When you think about how you’re going to move towards your goal, you’ll have a guide to look to as you go through the year. If it’s June and you still don’t have a new project management system, you’ll have a reminder about why that system is so important.

3. Remember how your money comes in
Most entrepreneurs know that money does not always come in the moment after you send an invoice to someone. In many cases, it can take anywhere from two weeks to one month to receive payment for a service rendered.

This is important to keep in mind when setting up financial forecasts for each quarter. While you might send out $400,000 worth of invoices in one month, you might only get back $300,000 when the quarter is over. The rest will come in during the next quarter. You will still have your money, but you will have to budget as though you didn’t receive it.

Always make sure you plan for the money in your account, not for the money that may be in your account.

4. Keep accurate records year round
Use records as a tool to predict how you’ll do at certain times of the year. You might see a slump in sales in January each year, so remember to set a realistic goal for that month or quarter. This will help you anticipate any annual market trends that you tend to forget over the course of the year.

5. Think outside the box
Looking to your past sales and revenue history is an excellent source of information, but it’s not the only one. Think about all that happens over one single year. The market falls and the market rises. Interest in some industries grows and some interest wanes.

Do research outside of your company and look at the industry as a whole. Check out business periodicals and see what’s going on in your industry right now. What problems are experts anticipating? Are there any developments in technology that you might want to invest in during the coming year?

When you look at challenges and potential new leads, you’ll be able to anticipate how they’ll affect your forecast. You’ll know when you should limit your spending to prepare for a market slump or when you’ll want to spend a little extra to invest in new technology.

6. Adjust when needed
Sometimes it’s painful to admit defeat, but it’s necessary if you goal becomes increasingly unrealistic. If your company is nowhere near reaching its goals by September, it may be time to scale back your goal and redefine what success is going to look like.

Knowing when to revise your financial forecast is crucial to improving your forecasting skills overall. You’ll learn to better read the trends in the market and how they may affect your business. You’ll also see how the seasons might affect your sales and how big holidays, such as Christmas, might make an impact.

As your business grows and shrinks from year to year, you’ll be able to ride out even the worst storms and be able to plan for big setbacks and unexpected gains.

Like a fine wine, you’ll get better at sales forecasting with each passing year. Once your small business gets a few years under its belt, you’ll have a better understanding of how your business grows and what you can do better anticipate which months might have a lower profit.

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